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Home > Prudential Regulation Authority > Implementing risk-based levies for the Financial Services Compensation Scheme deposits class – CP7/16
 

Implementing risk-based levies for the Financial Services Compensation Scheme deposits class – CP7/16

04 March 2016

Background

This consultation paper (CP) sets out proposed changes to the Depositor Protection Part in the Prudential Regulation Authority (PRA) Rulebook, and a new statement of policy in relation to the calculation of firm contributions to the Financial Services Compensation Scheme (FSCS).  The proposed rules advance the PRA’s general objective by establishing a sound funding framework for the FSCS and thereby minimise the adverse effect that the failure of a PRA-regulated firm could be expected to have on the stability of the UK financial system. A sound funding framework for the FSCS also enhances depositor confidence in the compensation scheme and therefore; contributes to financial stability.

PRA rules in the Depositor Protection Part currently require the FSCS to calculate firm levies solely on the basis of covered deposits. Article 13 of the recast Deposit Guarantee Schemes Directive (DGSD) requires that contributions to Deposit Guarantee Schemes (DGSs) should additionally be adjusted for the degree of risk incurred by each DGS member. The European Banking Authority (EBA) has issued guidelines to specify methods for calculating such contributions, as required by Article 13(3) of the DGSD. The PRA is setting out its proposed methodology towards the calculation of such risk-based levies that would apply to the repayment of both future compensation costs and existing legacy costs incurred by the FSCS.

The consultation is relevant to:

  • UK banks, building societies and credit unions as well as to overseas firms with PRA deposit-taking permission; and
  • the Financial Services Compensation Scheme (FSCS), as the administrator of the UK’s Deposit Guarantee Scheme (DGS).


Summary of the proposals covered by the CP

This CP proposes:

  • amendments to the rules governing the funding of the FSCS in Chapters 34, 49 and 42 of the Depositor Protection Part that would require the FSCS to adjust compensation cost levies for the degree of risk incurred by a DGS member. These would take effect from the 2017 levy cycle;
  • amendments to rules in Chapter 36 of the Depositor Protection Part requiring the FSCS to similarly risk-adjust legacy costs levies; and
  • a new statement of policy, specifying how the PRA intends to calculate the degree of risk incurred by a DGS member. Levies for all deposit-takers would be risk-based, but the PRA proposes different calculation methodologies for Capital Requirements Regulation (CRR) firms, credit unions and non-EEA branches due to their different legal and supervisory regimes.


The appendices in the CP set out:

  • proposed amendments to the Depositor Protection rules found in the Depositor Protection Part of the PRA Rulebook, and
  • a proposed new statement of policy, specifying the methodology the PRA proposes to use to calculate risk-based levies.

Responses

The consultation closed on Friday 3 June 2016. Please address any comments or enquiries to CP7_16@bankofengland.co.uk

This CP is part of a series of policy developments, details of which can be found in the ‘Depositor, dormant account and policyholder protection – summary’ available in the FSCS section of the website (see Related Links).

Consultation paper

Implementing risk-based levies for the Financial Services Compensation Scheme deposits class – CP7/16

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